The Allocator: IMQ’s Jeroen Tielman

Read more:

As it deploys €250 million, the firm is looking closely at commodities, emerging markets, global macro and mean reversion strategies.

Jeroen Tielman

An interview with Jeroen Tielman, CEO of IMQ
Investment Management.

IMQ Investment Management represents an unusual premise in the
realm of hedge fund seeding. Developed over 2008 by Jeroen
Tielman following a recommendation from a working group of the
Holland Financial Centre, the firm and its IMQubator seeding
fund have two distinct but related goals: to realise a return
for pension fund investors and to encourage more talented
investment managers to set up shop in The Netherlands.

IMQubator launched with €250 million from APG, the asset
manager for Dutch pension giant Stichting Pensioenfonds ABP.
After Rikard Lundgren joined IMQ as cio, the fund made its
first allocation in June 2009 when it committed €25
million to the Branta Solutions Fund, a sustainable-investing
hedge fund managed by startup Roodhals Capital. In line with
IMQ’s requirements, Roodhals’
founders had recently returned to Amsterdam from London.
IMQubator made its second investment, to an undisclosed
manager, in December.

Seeded managers are also incubated, with IMQ assisting with
risk management, marketing, operational infrastructure and
advice on the investment management process. The firm expects
all seeded managers to relocate and work with
IMQ’s team face-to-face. The seeder has begun the
New Year by moving to a larger office in Amsterdam big enough
to house at least its first 10 seeded managers.

IMQ has received over 170 applications from managers, the
majority from outside The Netherlands. The firm expects to be
invested in 10 managers by the first quarter of 2011.

Tielman started his career in 1986 with ABN Amro as an
investment analyst. A decade later he was global head of
product development for ABN Amro Asset Management. He left the
firm in 2000 to found FundPartners, an independent
product-engineering boutique for the pension fund industry. The
firm was acquired by Dutch merchant bank NIBC in 2004 and
Tielman joined the bank as director of pension business
development. He later worked for pension administration company
Cordares before setting up IMQ.

AR: How has the seeding landscape changed in the past
few years?

Jeroen Tielman: Obviously funding has become more difficult for
emerging managers since the start of the crisis, and we know of
some examples where seeding platforms have been restricted in
funding as well, or even stopped operations. We have charted
about 24 seed platforms, but we haven’t known them
long enough yet to draw general conclusions about the global
seeding market. We think that the flow of talented managers
establishing their own fund management companies might have
increased somewhat in the past few years, although a temporary
dip could be expected as the funding climate is still quite
challenging. IMQ is still receiving funding applications,
especially from non-Dutch teams.

AR: With hindsight, was 2008 a good time to set up as a
seed investor?

JT: Yes, absolutely—the combination of having fresh
funding for IMQubator in a market of scarcity in capital for
emerging managers is attractive for us. But I have to admit
that the timing of our initiative in this context has been more
luck than wisdom.

AR: So has the financial crisis been a good or bad
thing for a hedge fund seeding firm?

JT: This depends on the duration of the crisis, and how long
funding remains tough for emerging managers. If it takes too
long, we could see emerging manager candidates being
discouraged from starting their own asset management firms and
investors focusing on areas other than innovative alternative
strategies. However, at this moment stock markets seem to see
light at the end of the tunnel and we are seeing a steady
stream of high-quality applications. So if we assume the
financial system has seen its worst moments, the crisis has
been good for a seeding platform with capital available for
investment.

AR: How much do you invest in each fund, and do you
take an equity stake in the management firm? Do you receive a
share of fees?

JT: We invest €25 million in each fund and we do take an
equity stake in the management company. We’ve
chosen an equity stake instead of a gross revenue share as we
want the manager to preserve cash in the typically vulnerable
period at the start of their operations. This is also in the
interest of subsequent early-stage investors, who like to see
stability. We support the manager in making their investment
strategy and processes operational. In doing so we are paving
the way for early-stage investors. As we require the emerging
managers to run their new fund from our office location, we
think IMQubator can distinguish itself with its guiding and
monitoring of emerging managers. The fund will realize an
additional return for its investors when the equity stake in
the manager is sold, which would normally take place
three-to-five years after our initial investment.

AR: What are the main criteria you look for when
deciding whether to allocate to a manager?

JT: An innovative element, either in the opportunity universe
exploited or in the method. We are only interested in managers
who can show a strong risk discipline experience and track
record. Besides investment preferences, we also look at the way
the organization and operations are set up, and of course the
people involved. We look for talent and alpha, irrespective of
the strategy.

AR: How do you evaluate a manager’s
integrity?

JT: We do that through both internal and external background
checks, and it is clearly an issue on our radar during the
extensive interviews we typically have with managers in our
final rounds of selection. But even after we’ve
decided to invest in an emerging manager fund, we will always
insist on checks and balances in the investment and risk
management process design—for example, the requirement
of a separate custody of assets.

AR: What hedge fund strategies do you expect to do well
this year, and why?

JT: We do not try to predict the performance of individual
strategies for a single year. There are too many policy,
regulatory and capital allocation issues at play to make
meaningful projections. But the opportunity universes that look
potentially appealing at the moment are those for commodities,
emerging markets, global macro and mean reversion in different
market segments.

AR: Are there any strategy types that you are purposely
avoiding, and if so, why?

JT: We prefer not to follow the crowd into overpopulated
strategies. We also avoid those where the main performance
driver is a single price correction of a cyclical nature, such
as some elements of credit last year. We have a longer
investment horizon than a single year. We generally avoid
illiquid strategies unless we get adequate compensation for
taking that added risk.

AR: Do you prefer to invest in established managers or
startups?

JT: We focus on managers who are anywhere between just starting
operations, within let’s say three-to-six months,
and managers who have started operations not longer than about
18 months or two years ago. Institutional investors typically
exclude managers with a track record for their new venture of
less than three-to-five years, so we pick the managers we
believe to be attractive for institutions to invest in when
they have a track of three years.

AR: How long do you typically spend negotiating with a
manager before signing contracts?

JT: That depends on many factors, and is mainly determined by
our findings in the due diligence process, but the range would
be between 10 weeks and four months. If it takes longer, the
chances of concluding a successful deal decrease considerably
and 'broken deal’ costs become too high as a
consequence. We have recently cut off negotiations with a party
where we felt that after four months of weekly contact we were
going around in circles. On the other hand, in December we
committed to a team within three months of first contact.

AR: How many managers do you meet with for every one
you seed? And roughly what proportion of 'serious’
discussions fall apart before a deal is reached?

JT: So far, we have received about 170 applications and
counting. We’ve chosen about 130 for one or more
meetings, and we are conducting an intensive due diligence
process with about 10% of total applicants. We expect we will
eventually reach a deal with five-to-seven of them. So we seed
about 4% of the managers we decide to have a first meeting
with, and about 3% of all applications. These ratios do not
imply that we do not get quality applications; they might
indicate that we put the bar quite high.

AR: The industry has changed and most hedge fund
launches are smaller now than three years ago. What constitutes
a substantial launch, and how much capital does a manager need
to get off the ground?

JT: A substantial launch nowadays is with launch assets of more
than €40–50 million and annual revenue of
€400,000-500,000, in most cases. But it depends on the
amount of working capital provided by the manager itself,
average fees paid, lock-ups, availability of sticky capital
from friends and family, willingness and ability to defer
salary payments by the founders, and so on. For next-round
investors to join, we believe a manager needs to have assets of
€50-75 million, with a one- or two-year track record at
least.

AR: What can a hedge fund manager do to increase their
chances of securing seed capital?

JT: There is not a standard recipe for this, but the manager
should just focus on what they are particularly good at: having
profound experience in an international institutional investor
environment; having a very well-thought-out process for
investment management and also for risk management and the
back- and middle-office operations.

We think that key men within a hedge fund firm, who combine the
natural characteristics of being an entrepreneur and a proven,
talented investment manager, have a considerably bigger chance
of securing seed capital. Last but not least, the key-man team
should be composed of mature and complementary-skilled
professionals who communicate well, share common values, are
team players and have a deep-rooted feeling for the market. If
the manager hasn’t started yet, the unconditional
commitment should already be there to get started.

AR: Can you describe some of the situations in which
you have opted not to invest in a fund, and explain why that
decision was taken?

JT: Let’s look at some examples of teams who
dropped out as 'semi-finalists.’ Reasons to abort
the further selection process with candidates in this phase
have included imbalances in the composition of the key-man
team; risk management process issues; budget restrictions;
unforeseen complications when disentangling from their current
employer; and last-minute family issues coming up in cases
where a move from another continent was imminent.
I’d like to note that we rate highly the skills
and professionalism of all parties who make it to the final
rounds of selection, and it is with regret that we stop the
process with a team who have made it to the final selection
rounds.

AR: Do you have a plan for how to redeem from a seeded
manager? How do you judge when a fund has hit maturity, and
what factors would make you exit an investment?

JT: As far as timing is concerned, we will look at a
combination of the development of growth in assets and
performance. If you assume that the development of growth in
assets would be S-curve shaped, then you could expect us to
look for a timing of redemption around the middle of the
S-curve.

Our investment covers the €25 million allocation to the
fund, as well as the value of our 25% equity stake. Once we
think that investing €25 million in another fund provides
a better return for IMQubator, it is time for us to
redeem.